ECONOMICS: How globalisation puts profits before people

by Bob Browning

News Weekly, April 8, 2000

Bob Browining's writings are available on the internet at www.sprint.au/~rwb

When the Social Democrats seemed poised to win the Swedish election in 1994, the managing directors of four of the country's biggest international companies threatened publicly that, if taxes were raised, investments totalling 50 billion Skr would be at risk. Sweden's largest insurance company, Skandia, later sold its 1.8 billion Skr worth of government bonds to unsettle the Government's economic policy. It declared it would not purchase any more Swedish Government bonds - unless the Government took effective steps to cut its budget deficit. The Wallenberg group of companies, a substantial part of Swedish industry, also weighed in. The group threatened to relocate abroad unless sustained cuts were made in public expenditure.

The Swedish experience is one of a number of national case studies used by Ramesh Mishra, Professor Emeritus, York University, Canada, in his latest work Globalisation and the Welfare State (Edward Elgar Publishing, 1999). He illustrates the ways that globalisation puts pressure on nations to replace social market policies with US-style capitalism.

No system of social protection - European, Japanese, or Australian - is now immune from such pressures. In Mishra's view, all welfare systems are under attack as efforts escalate to internationalise national economies in ways determined by neo-liberal ideology and associated special interests.

Germany is another revealing case study. Unemployment in Germany was lower than in the US or Britain until the early 1990s. Germany had to bring in large numbers of "guest workers" to provide enough manpower to satisfy its surging economy. Even after the dauntingly expensive reunification with East Germany in 1989, German unemployment was still lower than that in the US. By 1992 however, external influences were beginning to tell. The requirements of the Maastricht Treaty, the European Union and the European Monetary Unit constrained Germany's policy options. From then on, Kohl's Christian Democratic Government made no serious attempts to maintain a policy of full employment.

Germany's social market capitalism was based on a consensual approach to industrial relations, namely a social partnership between employers and unions. The system of co-determination gave workers a significant presence on the supervisory boards and work councils of firms. Protective laws made it difficult for company managements to downsize like their lean and mean Anglo-US counterparts.

After 1994, with the election of a Conservative-Liberal coalition, employer organisations launched a campaign for wholesale reconstruction. They wanted a US-style capacity to downsize their workforces and retrench social policy provisions. They pushed for less union 'interference', a weaker social security net, fewer worker benefits, and lower wages. In 1997, Chancellor Kohl put together a substantial package of benefit reductions which reduced social spending by two per cent of GDP.

This move was not entirely on the initiative of German firms. They themselves were under pressure. Foreign investors, especially the huge Anglo-US-managed pension, mutual and hedge funds, were buying up shares in German companies. Demand was mounting for higher profits and performance. The German tradition of primary concern for stakeholders not just shareholders came under siege. Mishra argues from this that the real power centre of globalisation is in the transnational money market.

During the 1990s, German earnings from salaries rose only 10 per cent. Returns from capital rose 40 per cent. Corporate taxes were cut. So were withholding taxes on share dividend payments. The Organisation for Economic and Co-operation Development (OECD) endorsed the official rationale behind the cuts, claiming they put corporate tax rates "closer to world levels, and foreign investors would be placed on an equal footing".

When Germany attempted to go against the tide by levying a withholding tax on interest, for example, it resulted in a massive outflow of funds to Luxembourg, which has no such tax.

Tax changes in Sweden and Germany due to globalisation follow the Anglo-US model. The reduction in corporate and capital taxes and in the top rates on high incomes are coupled with a shift towards consumption taxes and increased social insurance contributions from individuals.

The justification was the claim that such moves made the tax system more investor-friendly and so increased the incentive for wealth creation. Political promises were made that the benefits from increased wealth production would trickle down to the lower orders, in the long run.

So far, however, the outcome has been significantly in the opposite direction. The movement of wealth has been sharply upwards, not downwards. What has moved downwards is risk and insecurity, widening the gap between rich and poor, the secure and insecure.

Until the combined impact on Germany of globalism, the European Union, the European Monetary Unit, and reunification with East Germany, Germany's workers had job security through employment protection laws and institutionalised collective bargaining. They were highly paid. The few unemployed were effectively compensated.

Now the German system is under attack for its "labour market rigidities". The OECD and IMF want the system made more "flexible". The Bundesbank and German Employers' Organisation vigorously support the claim that the German economy is inflexible and burdened by protective labour relations and the high wage and non-wage costs of labour.

The pressure for US-style "flexibility" in both Sweden and Germany is towards greater wage differentiation, lower wages, less job security and more decentralised (non-union) wage bargaining.

This ideology is transforming work around the world. This includes commodifying the "labour market" intensely. It even extends to the professions. Consider, for example, the way US-style managed care deprofessionalises its medical workforce. Doctors are hired or contracted so as to make them extend corporate bottom line priorities to the diagnosis and treatment of patients.

So far, globalisation has been producing more bad jobs than good ones. Inequality of wages and incomes is increasing, as is job insecurity and non-standard (casual, part-time) employment. Downward pressure is maintained through the threat and actuality of corporate relocation and capital flights. Outward investment by German industry in 1995 exceeded inward investment by 37 billion DM. German production has moved significantly to central European countries where wages tend towards one tenth of German wage levels.

The German welfare state is based on social insurance - employees (and employers) pay 20 per cent of wages to finance the social security system of pensions, medical care, sickness and unemployment benefits. This made Germany's system more acceptable to the Right for whom taxation-based redistributive systems are anathema. But a system based on contributions from wages and salaries runs into serious trouble when there is large scale unemployment, under-employment and precarious, intermittent employment.

Germany's system was designed to exist in conjunction with full-employment. Insurance-based social security systems begin to fail when a growing proportion of the population is capable of paying only smaller or irregular contributions. Many are no longer entitled to adequate benefits. Benefits are not available to all who need them (e.g., the young who have not built up any insurance). Germany has reduced sick pay and pensions, restricted and reduced unemployment benefits, and raised from 60 to 65 the retirement age for women.

Mishra analyses the pros and cons of seven propositions about the logic of globalisation:

* It undermines the ability of national governments to pursue the objectives of full employment and economic growth through reflationary policies.

* It results in an increasing inequality in wages and working conditions through greater labour market flexibility, a differentiated 'post-Fordist' workforce, and decentralised collective bargaining. Global competition and mobility of capital result in 'social dumping' and a downward shift in wages and working conditions.

* It exerts a downward pressure on systems of social protection and social expenditure by prioritising the reduction of deficits and debts and the lowering of taxation as key objectives of state policy.

* It weakens the ideological underpinnings of social protection, especially that of a national minimum, by undermining national solidarity and legitimising inequality of rewards.

* It weakens the basis of social partnership and tripartism, by shifting the balance away from labour and the state towards capital.

* It constrains the policy options of nations by virtually excluding left-of-centre approaches. In this sense it spells the "end of ideology" as far as welfare state policies are concerned.

* The logic of globalisation comes into conflict with the 'logic' of the national community and democratic politics. Social policy emerges as a major issue of contention between global capitalism and the democratic nation state.

Mishra's book is one of the most comprehensive, evidence-based efforts so far to argue that financial globalisation is the principal means by which the radical neo-liberal model is disseminated throughout the world with adverse impact on social security. He seeks to show that its power is now such that even large, well-organised economies, like the Rhine economies, are unable to fight back effectively.

Or, could it be, that politicians from ideologically converging main parties are able to get away with the claim that national states no longer have the power to fight back at all? Mishra concludes that it is both possible and necessary to make basic social standards a focal point for regulating the global market economy.

"Their raison d'etre would be to preserve the integrity of local and national communities and provide a level playing field for international competition. In this way it might be possible to preserve and/or build that integration between economic and social sectors which is perhaps the most important legacy of the post-WWll welfare state. At any rate, basic social standards - applicable globally - are of the utmost importance today in that they can provide a degree of stability and continuity for human communities in the context of global economic competition and technological change."